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The differences between centralized and decentralized cryptocurrency wallets?

Saakuru Labs

5 min read · Aug 8, 2022

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Before you start buying cryptocurrency and other digital assets for the first time, it’s important to think about how you’re going to manage them. You can’t keep track of what you hold without a cryptocurrency wallet of some kind. Although there are lots of different wallet providers to choose from, there are two main types that you’ll need to consider.

Those are centralized and decentralized wallets, otherwise known as custodial and non-custodial wallets. Both have their pros and cons when it comes to privacy, security, and ease of use, and every trader should be aware of those before jumping in. So, what exactly is the difference? Here’s what you need to know about centralized and decentralized wallets.

What is a cryptocurrency wallet app?

A cryptocurrency wallet app, in a nutshell, is a place where you can manage all the digital assets you own. It’ll show you the cryptocurrency tokens you currently hold and how much they’re worth — in real time. It will also allow you to transfer and receive tokens to and from other cryptocurrency traders. Many wallets now support NFTs as well.

New investors and traders should be aware that not all cryptocurrency wallets are the same. Some provide access to certain cryptocurrencies and exchanges that others do not have access to; some are backed by centralized exchanges that offer a level of support that others do not.

Some cryptocurrency wallets are known as “cold wallets.” These are physical devices, a little like flash storage drives, that can be disconnected from the blockchain when they’re not being used. However, by far the most popular wallets are “hot wallets,” which are software applications that are always connected.

Since hot wallets are the most popular today, particularly among cryptocurrency newcomers, they’re the ones we’ll be referring to in this article when we talk about the differences between centralized and decentralized wallet apps.

What is a centralized cryptocurrency wallet?

A centralized cryptocurrency wallet app, otherwise known as a custodial wallet app, is one that’s controlled by a central entity. They are usually offered by centralized exchanges, such as Binance. Custodial wallets give you the ability to send and receive cryptocurrency tokens, but they do not give you full control over your funds or your private keys.

Private keys are what prove your digital assets are really yours. They are long, randomly generated, and totally unique strings of digits that are used to authorize transactions. Without a private key, you cannot spend, withdraw, or transfer your cryptocurrency tokens.

What is a decentralized cryptocurrency wallet?

A decentralized cryptocurrency wallet app like MetaMask or Trust Wallet, otherwise known as a non-custodial wallet app, is one that is not controlled by a central entity. It gives users complete control over their funds and their private keys, eliminating the third-party.

Centralized vs. decentralized wallet pros and cons

Like most things, centralized and decentralized wallets have their pros and cons, and it’s very important to take note of these before deciding which is the best solution for you. Here are the key things to consider:

Ownership: If you want to be entirely responsible for your digital assets, only a decentralized or non-custodial wallet will give you that. But it’s up to you — and only you — to protect your wallet and your private keys. You can reset your password to a centralized wallet if you forget it, but it’s much more difficult to recover a lost device upon which your decentralized wallet is installed. Bear in mind, however, that when you use a centralized wallet, there is a slight risk that you could lose everything if the company behind that wallet folds. Security: Many consider centralized wallets to be less secure, since a central entity is an easier target for attackers. However, when you use a decentralized wallet, it’s up to you to ensure that no one else can access it. The device upon which the wallet app is installed should be secure, and you should not share your seed phrase with anyone. Anonymity: Because centralized wallets are controlled by central entities, most of them are governed by some kind of regulation in many markets. That means you’ll need to complete certain steps to create one — such as proving who you are. However, anyone can open a decentralized wallet and be mostly anonymous. Functionality: Only decentralized wallets can access decentralized applications or “dApps.” So, if one of your primary reasons for acquiring cryptocurrency is to use the growing number of dApps available, only a decentralized wallet will do. Support: Without a central entity to turn to, it’s more difficult to get support for decentralized wallets when things go wrong or don’t work as intended. However, centralized wallet apps are usually backed by official customer support teams who can help you deal with any issues that may arise.

What’s the best wallet for you?

Those who are new to cryptocurrency trading typically find that centralized wallets are the best place to start. Although you have to jump through some hoops to get set up, the process can be more welcoming for newcomers. Acquiring and trading cryptocurrency can also be simpler through a centralized wallet, and there’s support available if you need it.

However, if you feel comfortable enough with taking full responsibility for your digital assets, a decentralized wallet gives you greater flexibility — including access to more cryptocurrency tokens across many decentralized exchanges, and decentralized apps (dApps). You’ll be able to do whatever you want with your assets, and it will be up to you to protect them.

Some wallets are beginning to give users the best of both worlds. For instance, the upcoming AAG Wallet does away with complicated seed phrases in favor of more advanced and more secure login systems, while still providing users with access to the most popular decentralized exchanges and fiat gateways.

Of course, you don’t have to choose just one wallet. Most traders use both centralized and decentralized wallets for different purposes, and there’s nothing to stop you having as many wallets as you like. In fact, if you spread your cryptocurrency holdings across multiple wallet apps, you greatly reduce the risk of losing them all as a result of one failure.

Learn about centralized and decentralized cryptocurrency Wallets and earn $AAG

To incentivize our community to learn more about centralized and decentralized cryptocurrency wallets, we will award 10 $AAG tokens each to the first 100 people to correctly answer the questions about centralized and decentralized cryptocurrency wallets. The subsequent 900 people will then receive 5 $AAG tokens each.

Please click here to submit your answers.

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Written by Saakuru Labs

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